What do you all think about a single member llc taxed as a “sole proprietor” or “s-corp”? I want to form an llc but dont want to hassle with another member so is a single member llc worth it? Also do you guys recommend insurance for my llc if im only wholesaling and flipping? If i do a single member llc does the operations agreement need to be detailed or could i use a downloadable agreement found online?
Case law says you are wasting your time with a SMLLC and a download-able operating agreement.
wow really? what case law is this? does it have anything to do with the Ashley Allbright case?
ok well lets say that my mom, who is currently not working and doesnt plan to work becomes my additional member. So now we are a multi-membered llc and we get a solid operational agreement drafted by an attorney that shows how interests and all member duties etc are handled. However my mom says she wants no income from this buisness as im the one doing all the work, can it work like this? What about at tax time? It seems in my situation that a single membered llc would be the ideal choice.
The Albright case created the case the law to eliminate charging order protection in BK. That decision was based mainly on a poorly drafted operating agreement.
There is new case law where the single member was held liable for LLC debts because he chose to run it as a sole proprietorship.
Sounds like a sham to me. Mom needs to contribute something to the LLC in exchange for the membership interest. It could work if she provides some consideration for the LLC interest.
In simple cases, I prefer the multi-members to be the individual and a trust set up for the benefit of his children. It has estate planning benefits and a stronger defense to fraudulent transfers. Another method I have done is using an entity as the single member and controlling the LLC through appointment of a manager. I actually recommend people administer their investments through a type of holding company and use a limited liability entity to actually run the business. This set up allows more separation of the investments. The holding company can take on partners without subjecting its other investments to the partnership. Investments can be liquidated without considering the other lines of business. The holding company can distribute funds based on an individual investment. The options for flexibility become almost endless.
so i guess that the single member llcs are useless. :banghead
They have a use. They just don’t do much good for the typical investor.
I hate to keep picking your brain but what about a smllc with a rock solid OA that has charging order clauses or whatever the legal term is could it work then? I mean if they are not worth while then why do they even allow smllcs to be formed?
Unfortunately, an operating agreement cannot override case law. Charging orders are at risk and the OA can do very little about it. Smart planners modify existing plans based on case law. That is a big problem with DIY kits. Even if you have a rock solid agreement at the time of formation, gurus don’t provide updates and you have no idea what needs to be changed as new cases are decided.
I wouldn’t say they aren’t worthwhile. They just provide little protection when used as an exclusive remedy. Remember entities don’t exist for asset protection. They serve business needs and are just tools to do a job.
The typical investor doesn’t have $20K to get proper planning. Investors with $1-2 M don’t hire real planners because they think $20K is too much for what they have. Both groups are guru targets because they are not sophisticated enough to tell the difference between good planning and junk and think a few hundred is a great bargain. Gurus can create a single DIY kit for sale to the masses and spend their time marketing it instead of keeping current in the field.
Contrast investors at the $5M+ level who have no problem spending the money to get proper planning and will spend the $100K to defend themselves. They get a customized plan and don’t have a problem paying for it. Their stuff works when challenged.
I have used SMLLCs in the following way. A family manages the family investments through a limited partnership. Mom and Dad are the general partners with complete control of the partnership. The kids get limited partnership shares over time, which allows the parents to remove assets from the estate free of gift and estate taxes. The partnership owns property in SMLLCs and appoints a manager to manage the LLC. The LLC has no tax distinction, but provides a wall between partnership assets and property liability.
Don’t worry about asking questions. I’ll answer as best I can.
Wow BLL you know so much, how much would you charge to set mine up? (JOKE) Anyhow I live in TX and I read a post where mcwagner said:
“By statute single-member LLC’s receive the same treatment as multi-member LLCs.” Lets forget the charging order bankruptcy thing can the smllc protect me from civil liability? I think I really want to go the smllc route as it would be the easiest for me unless i get my mom as said before to kinda be a “silent partner”. :biggrin
Mark is correct. The problem is that a judgment of as little $12,000 is enough to force a debtor into involuntary bankruptcy, where Albright applies. BK cannot be avoided, but it really depends on how aggressive the creditor will pursue collection. The reality is that attorneys will settle for the insurance limits.
Nothing wrong with using the SMLLC. You just need to be aware of its limitations. You owe it to yourself to sit with a qualified planner to see what makes sense for you. Most will give you an hour of consultation for free. If they do charge, the charge will be applied to the cost of setting things up.
ok cool well i guess i know the route im gonna take i guess now its all about making it happen, thanks a mil BLL.
BTW: any suggestions for insurance? also where can i find the said “qualified planner?”
Use an independent agent or broker with access to several companies.
I only know of one who is reasonably priced and he does more hand holding than the typical attorney. However, he is not an attorney. I’ll PM you the name.
Hi BLL,
Would you please PM me the name as well?
Do you have any suggestions for lenders that do LLC loans? I checked with Wells Fargo and the difference between their LLC loans and non-LLC loans (using my name) is 7 points. Is this the normal case?
done
I’ve only heard of 1-2% more for loans held by an LLC.
Hello,
Thanks for this discussion. I am doing a little research project on this topic at present.
I was wondering what the name was of the case that decided that “the single member was held liable for LLC debts because he chose to run it as a sole proprietorship.”
Thanks,
Andrew
The case you are looking for is In re Ashley Albright, No. 01-11367 (Colo. Bkrpt. April 4, 2003). Keep in mind when you review this case that the court was dealing with a disreputable attorney who was subsequently disbarred and the LLC in question was a member managed LLC and not a manager managed. With a manager managed the outcome may have been different.
so do you still think theres still hope for smllcs?
I agree with AP Lawyer. Things would have been different. Unfortunately, bad cases make bad law and now we are stuck with it.
I am new here and just wanted to say thank you to all of you who take the time to give your opinions and answer questions. I’ve spent 2 days reading everything and am so relieved i found this website. I do have some questions I’ll post later.